- 3 min read
- Consult with an experienced attorney to see if you qualify for Chapter 7 bankruptcy.
- Be smart about evaluating all the debt relief alternatives to bankruptcy.
- Debt Settlement typically offers the lowest monthly and overall costs of any bankruptcy alternative.
Learn All About Chapter 7 and Chapter 13 Bankruptcy Alternatives
Bankruptcy offers some people a clean slate, but it is by no means an easy solution.
Bankruptcy destroys your credit. You may be forced to sell your assets. It can also affect your future employment. In addition, 2005 bankruptcy reform laws made it more difficult to file for chapter 7 bankruptcy, and limited other bankruptcy rights.
If you want to preserve your credit, you will be much better off if you do whatever you can to avoid bankruptcy. Although it is not easy, it is worth the effort. Follow these steps to avoid bankruptcy.
Quick tip #1:
Want to get out of debt at the lowest cost while avoiding bankruptcy? Get a no-cost, no-obligation analysis of your debt solution options from a pre-screened debt relief provider.
VIDEO: Bankruptcy - What is Bankruptcy?
Total All Your Debts
Only once you have a true picture of your debt can you take the next steps to avoid bankruptcy. Gather every bill, every statement, and every document that has an effect on your financial situation. Total up both your debts and your assets. Include your mortgage as a debt and the value of your home as an asset.
Now break down those debts into good and bad categories. Good debts are home loans and student loans. Bad debts are credit card debts, personal loans, high-rate car loans, and medical bills.
You should also list the interest rates and minimum payments for all your debts.
Reduce Your Expenses
Now total up all your expenses — everything you spend. Even the $1 you spend in the vending machine at the office should be included. Divide those two figures into necessities and non-necessities. Necessities are items you need to survive, like groceries and housing.
Non-necessities are nice things to have, but which you do not need, like that vending machine candy bar or designer sneakers.
Add up the minimum payments on your debts and the monthly cost for necessities. This is the minimum amount you need to cover your bills for the month. If you do not earn enough to cover them, then you need to find a way to reduce your minimum debt payments or necessities. Even little steps like switching from name brands to generics and canceling cable can help.
If you can cover your monthly bills, but are not making enough to pay down debt, then start cutting non-necessities until you free up enough money to reduce your debt.
If you have multiple small debts, getting rid of any one of them can be a challenge. By consolidating debt, you not only reduce the total number of bills and minimum payments you owe, but you also reduce the interest rate. So you can reduce your debt faster.
In addition to consolidating debt, you can get out of debt faster by paying more than the minimum payment every month. Funnel as much money as you can towards your debt every month.
Consult a Credit Counselor
Contact a reputable credit counselor if you need help totaling your debts, finding ways to reduce expenses, or consolidating debt. In addition to teaching you money management, they can help you qualify for a consolidation loan, whether it is in the form of a home equity loan or a personal loan. In some cases, they can help you set up a debt management program. Although there are fees, it may be what you need to avoid bankruptcy.
Consider Debt Settlement
If your debt vastly outweighs your income, then you may need to consider debt settlement. A credit counselor may be able to negotiate with your creditors to reduce the balance owed. Although debt settlement will ding your credit, it is not as big a hit as bankruptcy. Debt settlement should not be taken lightly, but it is a way to avoid bankruptcy if you have exhausted all other options.
Struggling with debt?
If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q2 2023 was $17.06 trillion. Student loan debt was $1.569 trillion and credit card debt was $1.031 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Collection and delinquency rates vary by state. For example, in Idaho, 14% have student loan debt. Of those holding student loan debt, 6% are in default. Auto/retail loan delinquency rate is 3%.
While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.